Coronavirus and Considerations for Real Estate Transactions: LENDINGMarch 19, 2020
Given the current market disruption and ongoing uncertainty facing both lenders and borrowers, in terms of immediate preparations and issues, parties should consider the following:
- Despite currently low interest rates, borrowers should consider swap options, particularly on construction and other low/non-cash flow loans to ensure the option is available if needed.
- Lenders and borrowers should review existing financing terms for future funding conditions as well as extension and increase options and consider whether early draws/exercise of options may be desirable.
- Borrowers should proactively review leasing restrictions in their loan documents, particularly with CMBS, serviced and large club deals with co-lender consents, to structure discussions with tenants in a manner that avoids the need for complicated lender consents which may become too time consuming and difficult to obtain in a fast-moving economic environment.
- Construction lenders and borrowers need to ensure they are already providing notices with respect to existing events and changes and ensure key decision makers on the loan are available to discuss plan changes as government services and workforce available change quickly.
In terms of transactions currently closing and new transactions arising during this challenging period, consideration should be given to issues including the following:
- Since interest rates are at record lows, borrowers may be tempted to rate lock. Before doing so and paying fees, make sure you have an extended time to close (at least 90 days).
- The definitions of force majeure, business interruption and work stoppage may require further clarification to include moderate to severe work stoppages and the unavailability of zoning, buildings department or other government services.
- Recourse carve-out guaranties will undergo additional scrutiny with respect to what actions a borrower should be permitted to take in an event of this type.
To accommodate serious, but temporary and systematic, business interruptions, borrowers and lenders will need to review their agreements and the particular circumstance each party faces. Herrick is actively monitoring the situation and accumulating a broad range of market intelligence from our discussions. We are here to help borrowers and lenders develop creative solutions to address the most complex problems presented to us.
© 2020 Herrick, Feinstein LLP. This alert is provided by Herrick, Feinstein LLP to keep its clients and other interested parties informed of current legal developments that may affect or otherwise be of interest to them. The information is not intended as legal advice or legal opinion and should not be construed as such.